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Talking the talk

2 October 2014 By Neil Unmack

The European Central Bank looks as far away from sovereign purchases as ever – so markets may have to make do with a proxy version. ECB President Mario Draghi disappointed markets on Oct. 2 by giving few hard commitments on its securities buying programme, and sending no signal that sovereign bond-buying would follow. Still, private asset purchases could be powerful.

With euro zone inflation still declining – to an annual 0.3 percent in the latest numbers – and the economy stagnating, pressure is on for the ECB to do more. The central bank has said it wants to grow its balance sheet back to its 2012 levels, through long-term loans to banks, and purchases of asset-backed debt as well as covered bonds. The first such liquidity injection was a flop. This week investors were hoping for precise details on the size of asset purchases, and an indication that so-called quantitative easing (QE) would fill the gap to get the central bank’s balance sheet up by about one trillion euros.

The ECB spelt out some technical details of the asset purchases – such as how it will buy junk-rated assets from Greece and Cyprus – but didn’t go much further. Draghi even played down balance sheet size as a policy target.

It’s too early to write off the private asset programme as ineffective. The central bank chief hinted that the covered bond purchase programme would be more ambitious than previous efforts – the last of which sputtered to a halt after only 16 billion euros. If the ECB buys in bulk and at high prices, covered bond investors may have to buy other assets. The money will trickle into corporate bonds, bank debt – but also sovereigns bonds.

The other strand of the ECB policy – securitised debt – is an even bigger gamble. By driving down the yield on senior-ranking asset-backed securities, the ECB wants to make it easier for banks to sell lower-ranking, riskier debt – to free up capital. Yet that depends on regulators unpicking the obstacles to securitisation, and investors believing defaults won’t rise due to the euro zone’s flat economy.

Given the uncertainties, it’s no surprise the ECB didn’t want to be tied down. So far, its current stance is having an effect. The euro has fallen to around $1.26, from $1.37 at the start of July. That should help euro exporters and boost inflation. To keep the currency weak, Draghi will need to do more than talk.



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